Government's plan to raise sectoral FDI caps faces opposition from ministries

NEW DELHI: The government's latest push to ease FDI caps may be set for a bumpy ride with several ministries and departments, including those of defence and civil aviation, raising concerns over the proposal.


A panel headed by department of economic affairs secretary Arvind Mayaram has suggested raising the foreign direct investment cap in multi-brand retail to 74% and allowing up to 49% investment in most sectors, barring sensitive ones, through the automatic route.

The government hopes that stable foreign capital flows will help fund the country's record-high current account deficit, which has also put pressure on the rupee. The currency has fallen over 13% since April. Finance minister P Chidambaram, who is spearheading the move to revive foreign direct investment and has the commerce and industry minister's backing on it, is currently in the US to prod large companies to invest in India.

While the ministries of defence, power, petroleum and natural gas, and consumer affairs have already expressed their concerns in writing to the Department of Industrial Policy and Promotion ( DIPP), some others are likely to do so soon.

Reports say the defence ministry wants the foreign investment cap in the sector to remain at 26%. However, higher foreign direct investment could be considered the cabinet committee on security only on a "case-to-case basis" if it results in access to modern technology, it has said.

"In the long term, we cannot afford to be dependent on foreign companies... therefore, foreign direct investment cap in the defense manufacturing sector should remain at 26%," defence minister AK Antony had said in a letter to commerce and industry minister Anand Sharma.

Similarly, the ministry of home affairs, which is yet to send a formal response to the DIPP, had raised concerns at a meeting last week related to licensing conditions, security and audit in sensitive sectors like defence, space, civil aviation and telecom.

Persons with knowledge of the matter said the ministry is not in favour of 49% foreign direct investment through the automatic route and wants safeguards in place. "The concerns of the ministry of home affairs are valid and will be considered," a DIPP official said.

According to Chidambaram, the decision to raise foreign direct investment caps will be taken by the third week of July after a cabinet note is circulated on the basis of inter-ministerial consultations.

The department of pharmaceuticals has firmed up its decision to oppose 49% FDI in brownfiled pharma projects through the automatic route, a person with knowledge of the development said.

Under current norms, 100% foreign direct investment is allowed in greenfield pharma projects through the automatic route and in brownfield projects through the foreign investment promotion board route.

The persons quoted above said the civil aviation ministry, too, does not want to raise the foreign direct investment cap in scheduled airlines to 74% from the current 49%. Concerns have also been raised by the ministry of micro, small and medium enterprises about the easing of sourcing norms in multi-brand retail trade. "There isn't much difference between 51% and 74%, however, we do not want the 30% mandatory sourcing from small enterprises to be relaxed," an MSME official said. "If they do not source 30% from Indian MSMEs, foreign retailers would rather source from China's MSMEs, especially electronic items," he added.

Although the telecom ministry is yet to respond to the Department of Industrial Policy and Promotion, the Telecom Commission last week approved raising the foreign direct investment limit to 100% from 74% now.

It also allowed 49% foreign direct investment through the automatic route, with further investments subject to foreign investment promotion board approval.